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Hello,

Looking for a little clarification on this question

I understand IR to be:

also defined as:

Now to the question:

32.1 Make the following assumptions:

Riskfree rate is 3%

The benchmark is the market (i.e., CAPM) and the benchmark return was 8%

Portfolio beta is 1.2

Portfolio return was 10%

Tracking error was 10%

Minimum acceptable return (MAR) was 2%

Downside deviation was 5%

What is (was) the information ratio?

a) 0.10

b) 0.20

c) 0.30

d) 0.40

Answer:

Alpha = 10% - (1.2 beta * 5% ERP) - 3% riskfree rate = 1%.

IR = alpha/TE = 1%/10% = 0.10

... please note that (B) is tempting because alpha of 10% - 8% is tempting. However, that is

active return not residual return (alpha).

Question:

I guess I don't understand active return vs. residual return? I was really confident it was simply (you also noted this might trick some folks... guess you got me lol):

10% - 8% / 10% = .20

Isn't that the equation for IR?

Looking for a little clarification on this question

I understand IR to be:

**Rp - Rb / s.d.(Rp - Rb)**<-----Denominator also known as**TE**also defined as:

**Alpha / TE**Now to the question:

32.1 Make the following assumptions:

Riskfree rate is 3%

The benchmark is the market (i.e., CAPM) and the benchmark return was 8%

Portfolio beta is 1.2

Portfolio return was 10%

Tracking error was 10%

Minimum acceptable return (MAR) was 2%

Downside deviation was 5%

What is (was) the information ratio?

a) 0.10

b) 0.20

c) 0.30

d) 0.40

Answer:

Alpha = 10% - (1.2 beta * 5% ERP) - 3% riskfree rate = 1%.

IR = alpha/TE = 1%/10% = 0.10

... please note that (B) is tempting because alpha of 10% - 8% is tempting. However, that is

active return not residual return (alpha).

Question:

I guess I don't understand active return vs. residual return? I was really confident it was simply (you also noted this might trick some folks... guess you got me lol):

10% - 8% / 10% = .20

Isn't that the equation for IR?

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